Market Comment 21st June 2012

So we got some more twisting from the Fed last night but investors were a little disappointed in the lack of any other big bazookas such as the introduction of QE3.

US indices came off their highs following the announcement but not significantly as even though we didn’t see QE3 the US economy doesn’t warrant it just yet. The world’s biggest economy is slowing as the PMI surveys, confidence data and most importantly employment numbers indicate, but it’s still in better shape than most and so the commencement of QE3 would have been welcomed by gold and equity bulls alike, but it might have been a rally that didn’t last long.

The problem of course is that in the past few years we’ve seen stimulus such as quantitative easing give economies a boost, in the case of the US a much bigger boost when compared to the UK, where our economy has simply been brought back from the deep recession of 2009 to a flat line. The difference here is that the US has not been having an austerity drive like the UK has, but at some point they will have to as their debt bubble gets bigger and bigger. But the real difficulty will be coming off the drip feed of QE as the effects of each round wears off, central banks will feel the urge and political pressure to undertake other measures to help boost growth. This dangerous spiral could easily take us down the route of Japan where anaemic growth will simply be a thing of the norm.

This morning sees a little bit of profit taking in European indices following on from the mild declines in the US. The FTSE is 30 points in the red back below 5600 at 5590 at the time of writing, and those clients who’d been selling into the rally of the past few days will be pleased to see a respite in the FTSE’s recent strength.

Lots of economic data to watch today in particular PMI numbers from Germany and the EU, retail sales from the UK and then from the US the weekly jobless claims, home sales, Phili Fed and then EU consumer confidence to round things off this afternoon. Already this morning we’ve seen the German PMI services number come in lower than expected. This is contributing to the slightly bearish sentiment in the markets as it shows that even Europe’s powerhouse is not immune to the fallout from the eurozone.

The Fed’s action of extending the maturity of its balance sheet assets failed to impress the global markets which as mentioned were expecting something from Ben Bernanke. After dropping initially the euro actually recouped the losses versus the greenback, but this morning the single currency is pushing a little lower in line with the weakness in other risk assets, trading at 1.2660 at the time of writing. Downside pressure is also coming from speculation that European Central Bank might consider a rate cut at its meeting next month.

Gold’s rally up until mid way through 2011 has been driven primarily by the Fed’s continued bouts of QE and so the lack of QE3 announced last night rather took the shine off the precious metal. With markets anticipating a more aggressive action from the Fed, and considering the Operation Twist increases maturity rather than the balance sheet itself investors found little reason to rush into gold. Meanwhile inflation numbers on both sides of the pond are falling so demand for the precious metal plunged. As a result gold prices lost 13 bucks to 1604 and have now dipped below 1600 to 1597 this morning.

The US Department of Energy released its weekly crude inventories which indicated the biggest levels since 1990. As a result the WTI crude prices dropped $2.24 to $81.80 and even reached the weakest point for eight months in intraday trading. Disappointment over what markets saw as an anaemic action from the Fed also played its bearish role.